Robodebt class action settlement proves monetary compensation not an essential ingredient of a settlement

In early June 2021, Justice Murphy of the Federal Court of Australia approved a settlement of $112m in the matter colloquially referred to as the Robodebt Class Action (Katherine Prygodicz & Ors v Commonwealth Of Australia (No 2) [2021] FCA 634). The decision has seen a spotlight placed once again on Australia's class action regime, showing that monetary compensation for each group member is not necessarily an essential factor in having a settlement approved.

The class action involved some 648,000 group members who received automated government notices stating that they were required to pay back welfare payments because they had apparently been overpaid. These calculations were based on the person's annual income data, sourced from the Australian Taxation Office (ATO), being averaged throughout the year to retrospectively determine their eligibility for fortnightly payments. This process was colloquially referred to as "robodebt". The lead applicant claimed that the use of income averaging to calculate these debts was unlawful, and that the government had been unjustly enriched by collecting debts on this basis. Claims were also made in respect of economic loss arising out of alleged government negligence, and damages for "stress, anxiety and stigma" that arose from receiving the robodebt notices.

The outcomes of class actions can affect and extinguish the rights of group members who have little, if any, control over the management of the case. For this reason, section 33V of the Federal Court of Australia Act 1976 requires that before any class action can be settled, the terms of the settlement must be approved by the court. The purpose of section 33V is to ensure that the Federal Court is satisfied that any settlement of a class action has been undertaken justly and in the interests of group members as a whole and not just in the interests of the lead applicant and the respondent.

The Robodebt Class Action was settled for a sum of $112m (inclusive of legal costs), on terms that left almost one-third of group members with no right to monetary compensation. Nevertheless, it was deemed to have met the threshold of "a fair and reasonable compromise of the claims of the applicants and class members", as is required for the Court to approve the settlement. The settlement was structured such that compensation payments would be owed to group members whose debts were at some point in time either wholly or partly calculated using income averaging, and had either made a repayment toward those debts or were found to have overpaid their rightful debts once they were recalculated.

At the same time, the settlement provided that no payment would be made to group members who, despite having had their debts calculated on the same basis, had not made repayments or had not overpaid their debts once recalculated. Instead these group members received from the settlement simply "the benefit of a declaration made by the Court that they do not have to pay back" the relevant debts.

The approval of the settlement means that notwithstanding their ineligibility to receive any payment, these approximately 202,000 (of a total 648,000) group members are bound by the release of liability, precluding them from pursuing their own claims through other avenues. Although the court remarked that these group members would not have succeeded in claiming they had suffered financial harm, they would now be deprived of having the opportunity to argue their case, as well as their potential claims regarding the "stress, anxiety and stigma" associated with the government's debt notices. One can only assume that the failure to obtain compensation for this element as part of a settlement represents the parties' assessment of the strength of evidence put forward in support of this cause of action. It does, however beg the question of why these group members were included in the class action "group member definition" in the first place if their claims and prospects were considered to be less legitimate or not sufficiently analogous to those of the lead applicant.

While Justice Murphy conceded that the fact that not all group members would receive a payment "troubled" him, he nonetheless approved the settlement, only modifying it slightly to allow for a late "opt out" by 680 group members who objected to the settlement, addressing in part the concerns regarding release of liability. Justice Murphy also considered that for group members who would not be eligible to receive payments, the settlement was "likely to provide a sense of vindication and “closure” through the Court’s declaration that their debts were unlawfully raised."

At the judgment's end, Justice Murphy said:

"Finally, for those perpetual critics of the Part IVA class action regime, the present case is one more example where the regime has provided real, practical access to justice. It has enabled approximately 394,000 people, many of whom are marginalised or vulnerable, to recover compensation from the Commonwealth in relation to conduct which it belatedly admitted was unlawful. The proposed settlement demonstrates, once again, that, when properly managed, our class action system works."

This decision puts Australia's class action industry on notice and demonstrates that the Federal Court is not only willing to consider settlements that do not pay out every group member to be "fair and reasonable", it may in some circumstances consider them to exemplify the administration of justice.